Guide to non-domicile tax status

Sadie Nichols, Personal Tax Consultant

Non-domicile (non-dom), is a British tax status that dates back to colonial times making it over 200 years old. The current domicile rules have been part of the UK tax system since 1914, and it was in this year that various restrictions were introduced. However, non-doms status remains an important feature of the UK’s international tax system.

Sadie Nichols, Personal Tax Consultant

Non-doms are individuals who are resident in the UK, but who claim that their domicile, being the centre of their personal and financial interests, is outside of the UK.

Domicile is an important concept which can impact how individuals are subject to income tax, capital gains tax (CGT) and inheritance tax (IHT) in the UK. 

How do you become non-dom?

Domicile is not defined by statute and is a concept of common law. Every individual has a domicile. Unlike residence, it is not possible to be domiciled in two countries or to not have a domicile.

There are two main ways that domicile is determined:

  1. Domicile of origin – this is either the country that you were born in or, if your father came from a different country, your father’s domicile. 

    As long as you can sustain an argument that your natural and permanent home remains with your domicile of origin, and you intend to return to your home country at some point ‘for the rest of your days’, you should retain your domicile regardless of whether you move to a different country.

  2. Domicile of choice - if you are over 16 and choose to leave your domicile of origin and live indefinitely in another country, you can acquire a new domicile of choice in that new country. This overrides your domicile of origin.

    In general terms, if an individual with a UK domicile of origin wishes to acquire a new domicile of choice outside the UK, they must either:
  • Leave the UK and settle permanently in that other country (including severing ties with the UK); or
  • If living overseas already, intend to remain in that other country permanently or indefinitely.

    Determining an individual’s domicile is not necessarily straightforward, but where an individual was born abroad, or has parents that lived abroad, or the individual has lived abroad for a long period of time, it can be worth investigating to determine their domicile status and how this may impact their tax position in the UK. 

What is ‘deemed domicile’ and how does that impact your tax position in the UK?

Non-UK domiciled individuals can be treated as being deemed domiciled in the UK for tax purposes if certain conditions are met. This does not change the individual’s domicile under common law but rather their tax status in the UK. Anyone with ‘deemed domicile’ status will be taxed in the same way as an individual who is UK domiciled. 

Non-doms will be classed as deemed domiciled for income tax, CGT and IHT purposes if they have been UK resident for tax purposes for 15 out of the last 20 tax years.

For income tax and CGT purposes, the deemed domicile status can be broken by a period of non-UK residence. The individual must have been non-UK resident for 6 complete tax years.

For IHT purposes, the deemed domicile status ceases once the individual has been non-UK resident for 4 complete tax years.

What are the benefits of being non-dom on your income and capital gains tax position?

Individuals who are both UK domiciled and tax resident are taxed in the UK on their worldwide income and gains.

If an individual is a UK resident but has a non-dom status, they can choose to be taxed on either the arising or remittance basis. 

Arising basis – income is taxed in the year in which it arises or is received. It makes no difference whether such income is brought back to the UK or kept overseas (i.e. taxable on worldwide income and gains). 

Remittance basis – Foreign income is only taxed in the UK if it is brought back (i.e. remitted) to the UK or is enjoyed in the UK.

UK-based income and capital gains will always be taxed on an arising basis for UK resident non-doms. 

The remittance basis must be claimed annually on your tax return. If no claim is made, the arising basis applies automatically. There is an exception if unremitted foreign income and/or capital gains is below £2,000. In these circumstances the remittance basis applies automatically so no claim is required.  

Individuals can opt in and opt out of the remittance basis on a yearly basis. This can be a good tax planning exercise as you will already know your income position for the tax year in question, allowing you to make an educated decision based on the full knowledge of liabilities arising in the UK.

When a claim for the remittance basis is made, no personal allowances or tax reducers will be available to use against the UK source income in that tax year. There will also be no entitlement to the CGT annual exemption. Note that a claim must be made for this to take effect, therefore, the £2,000 rule detailed above does not result in the loss of allowances. 

A review of the position will be required in more detail if an individual is dual resident; in certain circumstances the allowances could be reinstated.

Who is eligible to make a claim for the remittance basis and are there any charges?

Non-doms can claim the remittance basis free of an additional tax charge for the first 7 years of UK residence. 

Long-term UK residents who wish to continue claiming the remittance basis are subject to an annual remittance basis charge (RBC) payable via the self-assessment tax system.

Non-doms who have been a UK resident for at least 7 of the previous 9 tax years immediately before the relevant tax year will pay an annual RBC of £30,000.

Non-doms who have been a UK resident for at least 12 of the previous 14 tax years immediately before the relevant tax year will pay an annual RBC of £60,000.

Therefore, the suitability of claiming the remittance basis will depend on the level of foreign income, associated tax liability in the UK and how this compares to the relevant RBC.  

A simple yet effective tax planning opportunity would be to ensure a couple’s foreign income and any gains accrue to only one of them, thus ensuring only one annual charge arises.

Further key points to consider

  • The rates applicable to remitted income differ so that all remitted income is taxable at the non-savings rates (20% basic rate, 40% higher rate and 45% additional rate). 
  • You would still be entitled to make a claim for any foreign tax paid in the other country against the UK tax arising, provided there is a double taxation agreement between the two countries.
  • There are complex rules regarding what counts as a remittance, which includes income/gains brought into the UK for the benefit of certain relatives.
  • It is crucial to keep good records of your funds overseas to identify the source of funds brought into the UK and, therefore, how it will be taxed in the UK. Keeping separate funds is key to prevent disadvantageous mixed fund rules applying. 
  • Income accumulated in overseas bank accounts prior to the individual becoming a UK tax resident is known as ‘clean capital’, this can be remitted to the UK with no tax charge. 

What difference does being non-dom make for your inheritance tax position?

Estates of UK domiciled individuals (including deemed domiciled) are chargeable to UK inheritance tax on worldwide assets held by that person right before they die. 

In simple terms, the estate of a non-dom would only be chargeable to UK inheritance tax in respect of UK assets. This can result in a potentially advantageous position where IHT is concerned.

Non-doms should also consider lifetime IHT planning opportunities available to mitigate their IHT position in the UK further. This is particularly relevant where they may be caught by the deemed domicile provisions in the future. This is a complex area where specialist tax advice is required.

There are also key differences in respect of the IHT allowances you are entitled to in the UK. Non-doms remain entitled to the nil rate band (set at £325,000 per individual). However, they are not entitled to the full spousal exemption. UK resident and domiciled individuals can leave/transfer assets to spouses without incurring any IHT charges. This is limited to £325,000 for non-doms.

There are further planning opportunities available to maximise the overall position for mixed domiciled couples which we are able to advise on if relevant.   

Does making a remittance basis claim constitute tax avoidance?

No. The government defines tax avoidance as “bending the rules of the tax system to try to gain a tax advantage that Parliament never intended”. The non-dom rules are unambiguous and contained within statute thus allowing application in full.

How can Lovewell Blake help?

Non-domicle status is only one aspect of sometimes-labyrinthine international tax regulations, which is why Lovewell Blake provides a complete package of accounting services for international clients.

We have a great deal of experience advising clients on international tax matters, including those with non-dom tax status. Our advice includes reporting obligations in this country together with tax planning opportunities in line with current legislation. If you would like to speak to one of our specialists, please get in touch.#

 

Wide-ranging tax planning and compliance services for individuals seeking advice and guidance from our team of experienced and highly qualified professionals.

Friendly and coherent advice and guidance on accounting and tax matters for small business owners including those starting out for the first time.

Established businesses requiring accounting and tax compliance services, forward thinking tax planning advice and the support to help your business succeed.

Our full range of enhanced corporate services aimed at large companies and those requiring audit, assurance, corporate tax advisory and diverse tax planning services.

Glossary

Test

This is a test definition

more